“If I was looking for a store of value, I'd buy gold, wouldn't I?”

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Cyprus just re-opened its banks Thursday after a two-week bank holiday meant to stave off major financial crisis. European Union authorities imposed unprecedented financial restrictions on the Mediterranean island nation and went to drastic measures—including flying in a plane-load of euros—to keep the bank afloat.

This week, several worldwide news outlets seem to be pushing (or at least floating) the idea that the economic crisis in Cyprus is fueling a rapid rise in Bitcoin, the Internet’s favorite virtual currency. Bitcoin is now trading around $88 to one bitcoin.

Bitcoin watchers and financial experts aren't as convinced. While the two events may be happening simultaneously, there is little, if any, hard evidence to suggest that one event is fueling the other.

“If I was looking for a store of value, I'd buy gold, wouldn't I?” Edward Castronova, a professor of telecommunications, and an expert on virtual worlds and currencies, told Ars. “It's a hell of a lot safer than Bitcoin.”

So why is it rising?

Bitcoin’s surge didn’t just arrive out of nowhere: it’s come a long way in recent months. If you've been reading Ars lately, you already know that Bitcoin gambling is thriving. More recently, Bitcoin reached its previous all-time high, was hit by a major trading glitch, and has attracted the interest of the US government, which is now requiring it to comply with money-laundering laws.

One analyst who has been particularly pushing this Cyprus-Bitcoin theory has been Nick Colas, chief market strategist at ConvergEx Group.

“This is an entirely predictable and rational outcome for what’s happening in Cyprus,” he told Bloomberg Businessweek. “If you want to get a good sense of the stress European savers are feeling, just watch Bitcoin prices.”

Of course, earlier in March, before the Cypriot crisis got going, Colas also attributed Bitcoin’s rise to CoinBase’s partnership with Silicon Valley Bank. (Colas did not immediately respond to Ars' request for comment.)

UPDATE (8:33pm): Colas wrote back, pointing us to BitcoinCharts.com, saying that recent demand points to "ruble and euro" transactions. However, a glance at the chart also shows the highest volume remains in US dollars. Chinese renminbi transaction volume is also higher than Russian rubles, too. A spot check of other currencies also shows a recent similar rise.

"The US regulations certainly help make it feel more legitimate to US buyers," Colas e-mailed. "But there does seem to be a whole set of positive fundamentals at work."

“It's called gold.”

It's important to keep in mind that global financial markets were largely unconcerned about Cyprus until March 16, 2013. That's when the European Union and the International Monetary Fund announced a bailout package for Cyprus, which was contingent on the country raising money by levying taxes on its own bank account holders.

Since then, one entrepreneur put out a press release saying that he had an “intention” to build the first Bitcoin-based ATM in Cyprus. There doesn’t seem to be any evidence to suggest that will actually happen.

"Why would anyone trust an electronic form of money that could get hacked and then diluted into oblivion?" Michael Pento, president of Pento Portfolio Strategies, told CNBC. "We already have a form of money that is indestructible and whose supply cannot be increased by any government or individual decree. It's called gold."

What are the Spaniards and the Russians up to?

Another factor debunking this myth, experts point out that Cypriot bank accounts have been effectively frozen for the last two weeks. It’s highly unlikely that people in Cyprus were selling their euros for bitcoins.

“More likely, events in Cyprus dictate the expectations in Spain and other fragile Eurozone economies about how their crises will eventually be resolved,” wrote Eli Dourado, a research fellow at the Mercatus Center at George Mason University, in an e-mail to Ars.

“If they fear that their bank balances will be confiscated, Spaniards may decide that it is worth experimenting with Bitcoin." Dourado continued. "The Daily Dot reported that downloads of Bitcoin apps skyrocketed in Spain a couple weeks ago. Another argument might be that Russian oligarchs, who use Cyprus as an offshore financial haven, could have started pouring some of their funds into Bitcoin."

After all, Dourado reasons, one of Bitcoin's defining features is pseudo-nymity (not pure anonymity), which would be attractive for an investor that wants to protect his or her identity. But there's still no hard evidence to suggest ordinary investors in Spain, Russia, or anywhere else have been driving Bitcoin's recent rise. Plus, Bitcoin's own history has been so volatile as-is, this recent bump may just be part of its natural trajectory. Dourado is quick to recognize the reality here.

“In any case, this is all (at best) informed speculation."

Promoted Comments

It's probably true that those who live in Cyprus are not the ones directly responsible for driving up the price of Bitcoins right now, but that doesn't mean the Cyprus crisis isn't at least partly responsible for the rise. I live in the United States, but I read about what's happening in Cyprus just fine. I imagine lots of people do. When those who are on the fence about buying Bitcoin read about a story like this, I imagine "government / bank seizing / freezing bank accounts" might be enough to push them over the edge and make the purchase.

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Cyrus Farivar
Cyrus is a Senior Tech Policy Reporter at Ars Technica, and is also a radio producer and author. His latest book, Habeas Data, about the legal cases over the last 50 years that have had an outsized impact on surveillance and privacy law in America, is out now from Melville House. He is based in Oakland, California. Emailcyrus.farivar@arstechnica.com//Twitter@cfarivar

65 Reader Comments

"We already have a form of money that is indestructible and whose supply cannot be increased by any government or individual decree. It's called gold."

I have no idea if it's true, but I've heard that gold mining is largely regulated now, that the technology for finding gold is so advanced that the industry could haul it out of the ground by the ton and make the value plummet otherwise. Sort of like diamonds.

"We already have a form of money that is indestructible and whose supply cannot be increased by any government or individual decree. It's called gold."

I agree! Gold is deh best money. Oh, hey guys, on that note, I live in Utah and my friend in Japan agreed to sell me his house for $500,000 in physical gold. He wants the gold in an hour. How can I do?

"Why would anyone trust an electronic form of money that could get hacked and then diluted into oblivion?"

Uh, if you're going to use an inflammatory quote that's the complete opposite of true, could you at least point out that it may be misleading? Bitcoin is valuable exactly because there's only going to be 21 million. As far as a protocol hack, that's about as likely as breaking the cryptography it's based on.. if that happened, bitcoin is the last thing anyone would have to worry about, compared to https being "hacked."

Also, the euro exchange rate has been trading several dollars higher, and the price has been rallying at european dawn each day since Cyprus pretty consistently. I'm willing to bet the average gold collector and the average bitcoin user don't overlap hugely (generational and/or wealth gap?).

It's probably true that those who live in Cyprus are not the ones directly responsible for driving up the price of Bitcoins right now, but that doesn't mean the Cyprus crisis isn't at least partly responsible for the rise. I live in the United States, but I read about what's happening in Cyprus just fine. I imagine lots of people do. When those who are on the fence about buying Bitcoin read about a story like this, I imagine "government / bank seizing / freezing bank accounts" might be enough to push them over the edge and make the purchase.

I agree! Gold is deh best money. Oh, hey guys, on that note, I live in Utah and my friend in Japan agreed to sell me his house for $500,000 in physical gold. He wants the gold in an hour. How can I do?

It shouldn't be too difficult to arrange same day turn around from a pair of gold exchanges on either side of the Pacific. What medium the two exchanges elect to use (it will be USD, but that's not the point) is abstracted from the parties.

The reason gold is "safer" than BitCoin when your fiat currency is being meddled with by the person pursuant to whose fiat it was issued is that gold has universal social recognition of value. BitCoin doesn't. Yet.

So some "analysts" are thinking that the average Cypriot will invest their life savings in a currency that most people have never heard of, that exists only "on the Internet", that surely involves a high level of fear, uncertainty and doubt?

I wonder whether some of those "expert analysts" happen to have some money invested in Bitcoins. It would certainly explain their bullishness.

"Why would anyone trust an electronic form of money that could get hacked and then diluted into oblivion?"

Because they trust peer-reviewed open source cryptography more than they trust ass hat bankers that want to dip their grubby hands into their savings accounts.

Quote:

"We already have a form of money that is indestructible and whose supply cannot be increased by any government or individual decree. It's called gold."

So Cypriots will all be popping down to the corner shop to buy gold then? (which obviously will be available at perfectly reasonable prices), then carrying it home hoping they don't get robbed and storing it in their house again hoping they aren't broken into. Then when they want to buy a new pair of shoes they can go back to the gold shop and exchange it for EUR to buy shoes.

"We already have a form of money that is indestructible and whose supply cannot be increased by any government or individual decree. It's called gold."

I have no idea if it's true, but I've heard that gold mining is largely regulated now, that the technology for finding gold is so advanced that the industry could haul it out of the ground by the ton and make the value plummet otherwise. Sort of like diamonds.

It's not true. Stop believing gibberish.

Did I say I believed it? No, in fact I expressed skepticism. Thanks for being a dick though and helping me out with absolutely no information other than a counter-opinion.

According to gold.org, new production is only spun up as old mines spin down, there isn't a move to increase production. Production of gold has stayed the same for several years. Sounds like supply is being regulated at least on some level, but that's the only reference I can find.

"Why would anyone trust an electronic form of money that could get hacked and then diluted into oblivion?"

Uh, if you're going to use an inflammatory quote that's the complete opposite of true, could you at least point out that it may be misleading? Bitcoin is valuable exactly because there's only going to be 21 million. As far as a protocol hack, that's about as likely as breaking the cryptography it's based on.. if that happened, bitcoin is the last thing anyone would have to worry about, compared to https being "hacked."

Also, the euro exchange rate has been trading several dollars higher, and the price has been rallying at european dawn each day since Cyprus pretty consistently. I'm willing to bet the average gold collector and the average bitcoin user don't overlap hugely (generational and/or wealth gap?).

Bitcoin is only valuable because idiots believe that it is valuable. It is like any other fiat currency, save that its possible to completely destroy the entire system via a variety of routes, ranging from figuring out some way to break the mining system to setting up a false network of transactions to steal money to... well, the list goes on. The 51% problem still applies, as do others.

The bitcoin is mostly a scam perpetrated by a small group of people, plus some people who want to use it for illegal transactions and therefore have great incentive for trying to encourage others to use it - after all, if you cannot use it to turn back and forth into real money/goods, then it is without value.

Really if someone wanted to eat the entire system they probably could, its just that no one has any real incentive to do so.

"Bitcoin is only valuable because idiots believe that it is valuable."

As if the ability to transfer value... instantly... to anyone. For anything. Anywhere. At near-zero cost(pennies). Anonymously. Has no value? Is this a joke?

A scam... perpetrated by a small group of people? You are delusional. Hundreds of thousands of computers. The largest distributed computer project in the history of Earth. More horsepower than the largest supercomputers in the world. A $1 Billion market cap. With a B. You need to read up, honestly.

Whereas gold has masses of intrinsic value. Lets see, I can make a pretty bracelet out of it, use a minuscule amount of it to gold plate an electrical connector... er... use it as a heavy rock to weigh down my papers...

A scam... perpetrated by a small group of people? You are delusional. Hundreds of thousands of computers. The largest distributed computer project in the history of Earth. More horsepower than the largest supercomputers in the world. A $1 Billion market cap. With a B. You need to read up, honestly.

Whereas gold has masses of intrinsic value. Lets see, I can make a pretty bracelet out of it, use a minuscule amount of it to gold plate an electrical connector... er... use it as a heavy rock to weigh down my papers...

Gold is overvalued, but it actually has what might be called "intrinsic value" - you can make stuff out of it. The fact that some people use it as a fiat currency of sorts inflates its price, but its true value is still somewhat below platinum and above silver - it is a valuable substance. It is useful for electronics, and it is also handy for its non-reactive properties. If it was more abundant we'd use it for a lot more things than we do. And to be fair, decorative uses are far from useless, and it is a very useful decorative metal due to its resistance to corrosion and ductile properties.

It's not as easy as paypaling some money over to a btc exchange and then trading. Most require ID and proof of residency to do trades at any kind of volume. It can take over a week to get everything set up properly and begin trading. That is enough to make the "mainstream" trader not get into trading spontaneously due to global events.

As a Cypriot living in Cyprus, I would highly doubt anyone here converting their money into BC.

1, no businesses here accept it. At these times, where essential goods (food, medicines etc) are becoming a luxury to some, cash is the currency to have.

2, since the bail-in-out plan was voted, and we are staying in the Euro, it will take a lot more to collapse the currency that if we were going out of the Euro. Thus, people will not want to change to a different currency, more so now that the Euro is approaching an all time low

3, a lot of people are not computer literate (i.e. get on the Internet), so I would doubt they'd want to switch to a currency that's purely virtual, needs a computer to cash out and has not proven itself in the mind of the people.

4, and most important, is that all funds above €100,000 are locked. Small businesses don't have money to pay their people, and we are awaiting further measures to be introduced, which will further cut salaries / benefits etc.

So in the end, in the small island nation of Cyprus, people care more about their how their lives will be affected than converting their (non-existent) money to a new currency.

Probably a lot of factors for why bitcoin has shot up recently. Whatever the reasons, it's been a fun and exciting ride to watch.

I had been on the fence with bitcoins for a couple of years now. This week I finally took the plunge. What put me over the edge was 1) wanting to play online poker 2) all the recent news in the media about bitcoin recently.

Whereas gold has masses of intrinsic value. Lets see, I can make a pretty bracelet out of it, use a minuscule amount of it to gold plate an electrical connector... er... use it as a heavy rock to weigh down my papers...

Gold is overvalued, but it actually has what might be called "intrinsic value" - you can make stuff out of it. The fact that some people use it as a fiat currency of sorts inflates its price, but its true value is still somewhat below platinum and above silver - it is a valuable substance. It is useful for electronics, and it is also handy for its non-reactive properties. If it was more abundant we'd use it for a lot more things than we do. And to be fair, decorative uses are far from useless, and it is a very useful decorative metal due to its resistance to corrosion and ductile properties.

I have some non-corrosive aluminium and pretty sea shells here I would be more than happy to sell you for $51,000 per kilo?

I also find it hard to believe. It won't have been the Cypriots themselves, although all their deposits under €100,000 are guaranteed by the EU's Deposit Guarantee Scheme, their access has been limited over the last two weeks. No access means they couldn't have moved it anywhere else. Now a bank run hasn't materialised these access restrictions will likely be slowly lifted over the next weeks.

But, even then, I think if anyone still doubts the solidity of the Cypriot banks (or other European banks) they are more likely to move their deposits to Europe's very own safe haven, the Swiss Franc, than some relatively new and virtual scheme that still has to prove itself.

I've seen lots of people praising bitcoin as a "currency without a state" and that its better because governments can't manipulate it. Ok, fair enough. But somebody controls the money supply in bitcoin, and why should i trust them more than i trust a central bank?

Whereas gold has masses of intrinsic value. Lets see, I can make a pretty bracelet out of it, use a minuscule amount of it to gold plate an electrical connector... er... use it as a heavy rock to weigh down my papers...

Gold is overvalued, but it actually has what might be called "intrinsic value" - you can make stuff out of it. The fact that some people use it as a fiat currency of sorts inflates its price, but its true value is still somewhat below platinum and above silver - it is a valuable substance. It is useful for electronics, and it is also handy for its non-reactive properties. If it was more abundant we'd use it for a lot more things than we do. And to be fair, decorative uses are far from useless, and it is a very useful decorative metal due to its resistance to corrosion and ductile properties.

Gold is just like any fiat currency - it's value is what people believe it to be worth and what they are willing to pay for it.

Every Bitcoin story either talks this project up or down. To evaluate those which talk it up, we have to ask:

1. Qui Bono ? 2. At what point do those with large BC reserves decide to sell while the price ain't going to go up much more before the inevitable bubble puncture ?

Not the first Dutch Tulip craze.

So why am I talking it down ? For this type of technology to be genuinely useful rather than yet another extractive and exploitative form of money, forking the database would have to add value, rather than take value away. The future of alternative forms of money has to be multiple if these are going to be resilient.

Why should we trust the programmers who decide the rules and decide when to change them any more than any other wunch of bankers ?

2, since the bail-in-out plan was voted, and we are staying in the Euro, it will take a lot more to collapse the currency that if we were going out of the Euro. Thus, people will not want to change to a different currency, more so now that the Euro is approaching an all time low

An all time low against what? It's all time low against the dollar was below parity back in the early 2000s - it's still around 1.28.

I completely agree with the rest of your post though - this hype about europeans piling into bitcoins is a bit of hubris, methinks.

I live in Utah and my friend in Japan agreed to sell me his house for $500,000 in physical gold. He wants the gold in an hour. How can I do?

Every tried to buy a house in an hour without involving lawyers, building surveyors, land registries, verification of documentation, ownership title, local planning consents, clearing charges already registered on property, prior exchange of contracts or whatever other lengthy and expensive rituals your local lawyers engage in to justify their highly inflated fees ? If so, what planet are you living on sir ?

I've seen lots of people praising bitcoin as a "currency without a state" and that its better because governments can't manipulate it. Ok, fair enough. But somebody controls the money supply in bitcoin, and why should i trust them more than i trust a central bank?

You could even argue that the fact they are not state-backed makes Bitcoin relatively risky. At least in the EU your deposits are guaranteed up to €100,000 / £85,000 / DKK750,000. Many other countries have guarantee schemes as well. If Bitcoin collapses nobody is going to write you a cheque for your lost deposits.

I still find it incredible that so many people actually think that a) gold has any real value beyond oooh shiny (and conductive properties that don't generally concern the average person), and b) it's even remotely safe as a currency. FDR proved just how safe gold is in the 30s by making making it illegal to own, telling everyone to exchange it for cash.

A fairly large portion of the skeptical arguments is based on the misunderstanding of open source public key cryptography: "Why should we trust the programmers who decide the rules and decide when to change them". The point is that it is mathematically safe and completely transparent, but the technical details are a bit complex. It's basically "I don't understand it, so it's not safe." Not necessarily a bad attitude to have when dealing with the financial market (we could have had more of that in the last decade), but in this case the argument doesn't hold up.

The way I see it, bitcoins will either be here to stay (in which case the value will go up by a lot before it stabilizes), or it is really a bubble and will burst within a couple of years. I can clearly see the benefits of an all-digital form of money, so I am betting on the former with a small part of my savings (which I can in principle afford to lose). Hedging, bitches. It works!

I wouldn't say that the Cyprus thing has nothing to do with bit coin. I'm pretty sure the average person using Bitcoins or considering it has, if not more knowledge, at least a strong opinion towards currency systems and banks. Now if you look at what recently happened at the finance markets and with banks, concerns about how those work aren't out of thin air.A lot of people think "hey wait, they pump hundreds of billions to banks that basically gambled and lost it. This must between somewhere between fishy, asinine and fraud!". Now comes Bitcoin as something that promises to work under different premises and where many people advocate it as being better than government and state influenced currencies. Let's leave aside how valid this assumption is.

So if people concerned about how this whole finance and banking crisis develops now read that a European country just freezes peoples' bank accounts, this is definitely reinforcing their distrust in the system. Various parts of the journalistic world in Europe have portrayed what happens in Cyprus to be a small scale test of how well it goes to just do the money grab at peoples' savings. I'm pretty sure a lot of people outside of Cyprus regard the freezing of private assets as something shocking that kinda crosses the line.

I guess a lot of people in the US and elsewhere being interested in Bitcoin might have been tipped off by such an event to get some Bitcoin money.

[...]So if people concerned about how this whole finance and banking crisis develops now read that a European country just freezes peoples' bank accounts, this is definitely reinforcing their distrust in the system. Various parts of the journalistic world in Europe have portrayed what happens in Cyprus to be a small scale test of how well it goes to just do the money grab at peoples' savings. I'm pretty sure a lot of people outside of Cyprus regard the freezing of private assets as something shocking that kinda crosses the line.

I guess a lot of people in the US and elsewhere being interested in Bitcoin might have been tipped off by such an event to get some Bitcoin money.

Hopefully this crisis will make people more aware that banks have intrinsic risks too. If one or two banks offer much higher interest than the global competition (see Cyprus) depositors should be mindful that something fishy is going on and their bank has a higher risk. In Cyprus some banks went bankrupt and instead of taxpayers bailing them out, their depositors had to share the brunt of risky dealings. The troika still had to send an additional €10bn as Cyprus was too small compared to its banks debts to save itself.

That might be a new insight for many, particularly after many big taxpayer-funded bank bailouts worldwide. What should not be new insight is that you should never exceed the guaranteed amount per bank. Any financial advisor or brochure will tell you to split large amounts across various banks as amnounts above it are simply not guaranteed.

It's probably true that those who live in Cyprus are not the ones directly responsible for driving up the price of Bitcoins right now, but that doesn't mean the Cyprus crisis isn't at least partly responsible for the rise. I live in the United States, but I read about what's happening in Cyprus just fine. I imagine lots of people do. When those who are on the fence about buying Bitcoin read about a story like this, I imagine "government / bank seizing / freezing bank accounts" might be enough to push them over the edge and make the purchase.

Not sure this really makes sense though. Bitcoins have been more volatile than dollars, are hard to access and use, and have no inherent value. Its like a state currency but without the state to back it up. Their value is entirely created by the users, and if users faith is shaken in the extraordinarily small Bitcoin market, the end result will be currency that's worthless. I just don't see very many Americans deciding to invest in this instead of keeping money in the bank. The Cypress deal was caused by EU politicians asking for a pound of flesh. The US doesn't have anything like the problems Cypress does because we have our own currency, we aren't stuck negotiating with a central bank that's primary under the control of a few big Euro countries.

Gold prices have been on a six month decline, have an incredibly greater capitalization than Bitcoin (trillions instead of millions) and is unlikely to be reversed by a tiny country's issues. Cyprus deposits are frozen, so no one could even buy gold if they wanted.

Meanwhile, the volume increase in Bitcoin activities coincides too closely to the Cyprus events but I am not convinced it is caused Cyprus depositors either.

It's more likely that certain shady transactions passing through Cyprus have been re-routed through Bitcoins to avoid taxation or a paper trail.

The reason gold is "safer" than BitCoin when your fiat currency is being meddled with by the person pursuant to whose fiat it was issued is that gold has universal social recognition of value. BitCoin doesn't. Yet.

I still don't get why anyone values gold, its one of the more useless things humans have latched onto all over the world. Iron, Bronze, and Copper were all useful for practical purposes, and we've found amazing uses for most of the other minerals in the world, but for some reason most of the gold in the world is either in jewelry or poured into bars sitting in storage. All that human effort wasted on a decoration, seems like some kind of collective genetic racoon-like insanity for shiny things.

Then again, I would't buy or wear jewelry of any kind, so maybe I'm the crazy one?

I still find it incredible that so many people actually think that a) gold has any real value beyond oooh shiny (and conductive properties that don't generally concern the average person), and b) it's even remotely safe as a currency. FDR proved just how safe gold is in the 30s by making making it illegal to own, telling everyone to exchange it for cash.

A fairly large portion of the skeptical arguments is based on the misunderstanding of open source public key cryptography: "Why should we trust the programmers who decide the rules and decide when to change them". The point is that it is mathematically safe and completely transparent, but the technical details are a bit complex. It's basically "I don't understand it, so it's not safe." Not necessarily a bad attitude to have when dealing with the financial market (we could have had more of that in the last decade), but in this case the argument doesn't hold up.

So which _version_ of the Bitcoin software are you saying this about and were you aware that the key Bitcoin players agreed to roll back a previously decided software version change recently causing a temporary Bitcoin network fork ? The comment I made which you quoted wasn't based on any lack of understanding of the cryptography (that's a subject I teach), but relates to policies decided by humans within the network concerning how to apply the cryptography, partly expressed through software complexity, based on the fact that certain players with enough influence decide on software changes, and partly based upon human policy statements coming from network participants claiming that hash computation cost will be made into an arbitrary value at an arbitrary date in future. So who makes these human policy decisions and on what basis ? If it's whoever controls the most stolen or misappropriated CPU cycles and pays least for the electricity used in crunching the numbers, whilst claiming technical magic wizardry as their cover story *, what confidence does that raise in the capacity of criminal botnet operators, or large network sysadmins making unauthorised use of employers' computers to maintain responsible stewardship of a serious financial network in the interests of anyone other than themselves ?

And if they choose to decide to lengthen the numbers to make it possible to mine 10x or 100x the numbers of Bitcoins in future compared to current policy, why shouldn't they - other than to the extent they are concerned about maintaining credibility amongst those credulous enough to leave themselves seriously exposed ?

* (As examples of these cover stories, last year BC protagonists were claiming "GPU mining rigs to be more powerful and cost effective at Bitcoin mining than botnets", this year "it's all being done using fashionable custom ASIC hardware". Will they be claiming to be using quantum computers for this purpose next year perhaps ? ).